Can states hold remote sellers liable for back sales tax?
- Oct 2, 2018 | Gail Cole
When the Supreme Court of the United States overruled the physical presence requirement in its decision on South Dakota v. Wayfair, Inc. (June 21, 2018), it removed the barrier preventing states from taxing remote sales. However, it provided little guidance on how states should or could go about taxing sales by sellers with no physical presence in the state. To prevent making waves, many states are emulating the law that opened the floodgates.
South Dakota adopted an economic nexus law. It imposes a tax collection obligation on sellers with no physical presence in the state that have, in the current or preceding calendar year:
- More than $100,000 in gross sales of tangible personal property, intangible property, or services for delivery in the state, or
- 200 or more transactions of the same for delivery in the state
Though the court failed to establish a bright-line test in the same vein as the physical presence rule, it did highlight three aspects of South Dakota’s tax system that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:
- Prospective enforcement: No obligation to remit the sales tax may be applied retroactively.
- Small seller exception: $100,000/200 transactions
- Sales tax simplification: South Dakota participates in the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance cost by having a simplified tax rate structure, state-administered sales taxes, and uniform definitions of products and services.
This post focuses on prospective enforcement.
States that jumped the gun
A handful of states had adopted economic nexus laws prior to the Supreme Court ruling, banking on a South Dakota victory. Some held off on enforcing their laws until they could see how the court ruled; others were prevented from doing so by legal challenges.
When the physical presence rule was overruled, some of these states initially sought retroactive enforcement of their laws. Hawaii was one of these, though shortly after announcing it would enforce economic nexus retroactively, it changed its mind. Nonetheless, Hawaii still gave retailers very little time to get their heads around the law and prepare to comply: The Wayfair decision was announced June 21, 2018; economic nexus took effect in Hawaii on July 1, 2018.
States that towed the line
As of this writing, all states with economic nexus (listed below with effective dates) have stated they’ll enforce it from the effective date forward for remote sellers with no physical presence in the state. They will not seek to enforce retroactively.
- Alabama (10.1.2018)
- Colorado (12.1.2018)
- Connecticut (12.1.2018)
- Georgia (1.1.2019)
- Hawaii (7.1.2018)
- Illinois (10.1.2018)
- Indiana (10.1.2018)
- Iowa (1.1.2019)
- Kentucky (10.1.2018)
- Louisiana (1.1.2019)
- Maine (7.1.2018)
- Maryland (10.1.2018)
- Michigan (9.30.2018)
- Minnesota (10.1.2018)
- Mississippi (9.1.2018), provided remote sellers meeting the economic nexus threshold register with the state by 8.31.2018
- Nebraska (1.1.2019)
- New Jersey (11.1.2018)
- North Carolina (11.1.2018)
- North Dakota (10.1.2018)
- South Carolina (11.1.2018)
- South Dakota (11.1.2018, except for the respondents in South Dakota v. Wayfair, Inc.)
- Tennessee (effective date TBD)
- Utah (1.1.2019)
- Vermont (7.1.2018)
- Washington (10.1.2018)
- Wisconsin (10.1.2018)
- Wyoming (effective date TBD)
Nonetheless, businesses shouldn’t assume this forgiving nature will endure. If qualifying remote sellers don’t collect and remit from the effective date forward, they’ll likely face penalties and interest on any sales tax owed. Mississippi has already made that clear.
States that are uncompromising
A small number of states bucked the trend, taxing remote sales in a way that strayed from South Dakota’s example. Their laws took effect prior to the Wayfair decision, and they insist remote sellers are liable for taxes back to the effective date.
Massachusetts. According to the Massachusetts Department of Revenue, the state’s tax on internet vendors “continues to apply and is not impacted by the Supreme Court’s decision [in South Dakota v. Wayfair, Inc.].” It’s enforceable as of October 1, 2017, the date it took effect.
Rhode Island. Remote sellers doing a certain amount of business in Rhode Island have been required to register with the state and collect and remit tax as of August 17, 2017, or comply with use tax notification and reporting requirements for non-collecting sellers.
According to the Rhode Island Division of Taxation, “non-collecting retailers are not affected by the Wayfair decision for Rhode Island sales/use tax purposes under existing Rhode Island law. … Those that fail to comply with the August 2017 law remain subject to [penalties]. … The August 2017 law remains the law in Rhode Island until such time as it is amended or repealed.”
The division provides helpful guidance for non-collecting retailers, referrers, and retail sales facilitators and reminds that Rhode Island is a member of the Streamlined Sales and Use Tax Agreement, meaning it has worked to substantially reduce the burden of sales/use tax compliance. That said, remote sellers not currently required to collect and remit sales tax under Rhode Island law are invited to do so voluntarily.
Ironically, Florida is an outlier. It’s one of two states with sales tax (the other is New Mexico) plus the District of Columbia, that hasn’t attempted to capture remote sales tax in some way — all others have passed laws under which an obligation to collect is established via ties to in-state affiliates (affiliate nexus), referrals from in-state websites (click-through nexus), or economic nexus. Nonetheless, Florida has already sought to apply the Wayfair decision retroactively.
Arguing against refunding excise taxes paid by an out-of-state seller, Attorney General Pamela Bondi said, “Wayfair controls the outcome of this matter, and there is no reason that case should not be applied retrospectively as well as prospectively.” She acknowledged that South Dakota’s economic nexus law “expressly forbids retroactive application,” but insisted, “this was hardly the basis for the court’s decision” (hat tip to Bloomberg BNA).
While Florida’s case makes its way through the courts, other states may attempt to apply new or existing remote seller sales tax laws retroactively. However, they’re being counselled against it.
The bipartisan National Council of State Legislatures (NCSL) advises states to “avoid pursuing retroactive back taxes” and to join the Streamlined Sales and Use Tax Agreement if they haven’t already. Furthermore, the NCSL SALT Task Force has adopted Principles of State Implementation post South Dakota v. Wayfair, Inc that encourage states to reduce undue burdens on remote retailers by prohibiting retroactive tax collection, providing a safe harbor for small sellers, and simplifying sales and use tax administration. Max Behlke of NCSL is emphatic: “States need to do this right.”
Find out where you have economic nexus with our state-by-state guide.